Skin City

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Skin City

Danny Ting is staring at his latest delivery from Netflix. There's nothing wrong with the disc (season two of GI Joe). But something is different about the familiar red and white envelope. "Let me bring in my archive," he says.

Ting walks past the framed Jenna Jameson on the wall and the pornographic magazines on his partner's desk, heading for the hallway. He returns with a 4-inch stack of Netflix envelopes and lays an earlier version down beside the new one. Then he sees it: In place of the old paste-on address label, the newer sample has his address printed right on the envelope, with a barcode above it. "See that?" Ting says. "They're probably 20 to 30 percent more efficient, the way they're doing it now."

Ting has never been inside a Netflix distribution center. He has never directly observed the clockwork precision of its fulfillment system. But he has spent hundreds of hours trying to figure out how the company works. He's actually a bit obsessed with the movies-by-mail innovator, and he's determined to reverse engineer its success. Ting, 30, is cofounder of WantedList, which he is trying to turn into the Netflix of the porn industry. For $22.95 per month, WantedList sends its customers an unlimited number of X-rated DVDs (they can have three out at a time). Four years after launch, WantedList has purchased or outpaced all of its couple of dozen competitors, making it the largest player in the rental porn-by-mail niche - a growing chunk of an industry estimated unreliably to be worth $10 billion a year. With 25,000 customers and a widely hailed interface, WantedList was Adult Video News' Best Online Retailer for 2005.

It's not the career path Ting and his partner Anh Tran, 29, expected. Five years ago, they were Silicon Valley tech consultants, working at Arthur Andersen for clients like Intel, Brio Technology, and Southern California Edison. Today, their San Fernando Valley office space has a warehouse stocked with enough dirty DVDs to keep a Jamboree's worth of Boy Scouts permanently ensconced in their tents. Their schedules include meetings with sex toy experts and parties with porn stars. They have xxx wl tattoos on their wrists.

What they don't have, though, are profits. And that's puzzling. From subscription Web sites to tiny video production companies to pay-per-view cable channels, porn, after all, generates piles of cash for everyone. The movie rental industry (including some porn) is worth $8 billion, but Blockbuster and Netflix decline to stock adult titles in order to maintain a family-friendly aura. That leaves money on the table for the nation's 15,000 mom-and-pop video rental stores, which derive more than 10 percent of their profits from adult titles. The WantedList founders figured their online business could get a piece of this action by letting porn renters avoid the embarrassment of face-to-face transactions ("So, Domination Diaries #3 is due back Saturday. Enjoy!").

But WantedList has found it difficult to attract and keep customers. When it launched in 2001, Ting and Tran told potential investors that they would have 400,000 subscribers by 2004. Today they're stalled at just over 5 percent of that. "They were very farsighted in coming up with this business plan," says Frederick Lane III, author of Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age. "The question is, Is it viable and sustainable?"

WantedList owes its creation to the serendipity of airline seat assignments. One of Ting's colleagues at Andersen found himself next to a Netflix VP on an LA-to-San Francisco run in 2000, and the two spent the flight talking about the rental business. When they landed, Ting's buddy called him with the pitch: They'd swipe the model but offer only pornography. Ting was intrigued. But the friend's fiancée didn't like the idea of marrying a would-be porn mogul, so he dropped out. Ting recruited Tran, an Andersen colleague he'd met on smoking breaks. Over dinner in a San Jose noodle shop, they began building the business case.

They knew they would face obstacles. For one thing, Netflix might start offering porn. They dismissed the chances of that happening, a guess that seems solid now that Netflix has a business relationship with the famously abstemious Wal-Mart. Another problem was their parents, who'd originally hoped both young men - Ting, with a degree in industrial management from Carnegie Mellon, and Tran, who majored in Asian American studies and public policy at UCLA - would become doctors. Tech consulting was less prestigious but still acceptable. If they heard their sons were pornographers, Mom and Dad would likely need medical attention themselves.

By the summer of 2001, they had quit their jobs, told their parents they were self-employed Web consultants, and moved from the Bay Area to a town house in Alhambra, California. Ting handled the technology, and Tran managed finance and marketing. Seeking investors, they pitched their business plan to established porn players, including Vivid and the owners of Hustler, but no one bought it. So the founders got personal loans, maxed out their credit cards, and sold their stocks and motorcycles, raising about $200,000 to finance the business. After four months of maniacal programming, they launched the site with 6,000 titles (including their personal 30-disc collection) and only themselves to sort movies and stuff envelopes. They hoped to have 10,000 subscribers within a year.

They only got 1,000. Most mainstream media won't take adult ads - no banners on IMDb, no radio commercials, no billboards. They had planned to spend $15 per subscriber on customer acquisition, but limited mostly to click-on Web ads, they spent $25.

So they got tricky. They hired a marketing firm to search the hard drives of members of peer-to-peer services like Kazaa. When the firm found one filled with porn, WantedList emailed an invitation to a free trial. That tactic helped them gain almost 10,000 subscribers by the end of year two, which gave them the cash flow to move into their Van Nuys office in October 2003; it's in an industrial park where a third of the tenants are adult-industry players. By 2004, they had 15,000 titles in stock and had begun buying up rivals.

Still, acquiring new customers remains a problem. Which is why, just before noontime on a scorching summer day, Ting and Tran are driving the company Acura MDX through Beverly Hills, en route to lunch with Dave Levine, the founder of Sextoy.com. Much of WantedList's recent growth has come from partnerships with sites like Levine's. Over an al fresco lunch on Sunset Boulevard, they talk about whether the Colin Farrell sex tape will be made public and how Sex and the City made vibrators more socially acceptable. They compare weekend plans. It's a profitable relationship: On a good day, WantedList picks up 30 new subscribers from Sextoy.com.

That steady flow of newbies is essential because WantedList loses clients fast. Five percent of Netflix customers cancel each year; WantedList's "churn" is twice that - such burnout is common in the industry. "Most people can view only so much porn until they sort of reach their limit," says Jax, who runs a rival service called Sugar DVD (and who, like many industry players, uses a one-name pseudonym). "There's the guilt factor, which can't be overrated. You see customers struggle with that - they leave, come back, leave, come back." While the average American probably consumes a steady diet of Hollywood movies, WantedList's experience suggests demand for porn cycles up and down. It's only natural, for instance, that a single person's urge to rent explicit fare might ebb at the start of a relationship, either because the new partner disapproves or because sex has become a two-person sport.

To keep subscribers hooked, the guys are trying to turn WantedList into a sort of porn portal, a site that goes well beyond simple rentals. They run interviews with stars (most frequent question: "Do you prefer sex with men or women?") and feature a recommendation engine called the Pornotron 6900. A tall, pigtailed woman named Maria Menendez provides capsule reviews. Of Barely Legal #50, she writes: "Make sure to get a fresh box of Kleenex and some serious lube when enjoying this slice of nasty pie."

After lunch, Ting and Tran head back to the office to meet with an associate of Seymore Butts, the porn producer who stars in Showtime's reality series Family Business. Butts and WantedList have decided to jointly sponsor a contest modeled on Maxim's search for "hometown hotties." Women will compete to become a "tushy girl," and the winner will get to appear in Butts' movies. It's the latest in a string of contests, including Label That Labia (subscribers identify stars based on photos of their genitals).

All this is a world apart from Silicon Valley consulting - and not a business for the prudish. "You really have to want to immerse yourself - lunches, events, trade shows, parties," says John Wells, who founded Flicksmart.com, an X-rated rental service, in 2001 and sold to WantedList in 2004. (He retains equity and a board seat.) Wells, married with kids, wasn't into it. "The more we learned about the adult business - the restrictions, the difficulty, the stigma - the less we wanted to be in adult."

But Ting and Tran have embraced the lifestyle. At 3 o'clock on a recent afternoon, an ultraskinny 23-year-old arrives for a meeting. "Who do I hug first?" squeals Jenna Haze, a prolific adult-film actress whose mostly nude photo is all over their Web site. Stoned, wearing a tiny denim skirt, black tank top, and no underwear, she ignores her constantly ringing cell phone as they trade industry gossip - who's dating whom, who's shooting what. Then they discuss Haze's career dilemma. Out of deference to her boyfriend, she hasn't had on-camera sex with a man in more than two years, but she's tired of filming lesbian scenes. She's decided to deliver him an ultimatum: Marry me or I'll perform with men again.

Ting, ever the numbers guy, offers his support. "Your most popular movies are your guy movies," he says. (Since the meeting, Haze has announced her intention to resume performing with men.) And then business is transacted: Haze agrees to do another photo shoot for the Web site and to sign autographs at their booth at an upcoming convention. "I'm addicted to Netflix," Haze says. "If I actually watched porn, I'd be addicted to WantedList."

Though they've traded in cubicle life for flirting with sex kittens, Ting and Tran are still geeks at heart. Walking through the warehouse, Ting explains the numeric cataloging system he developed to speed the sorting and mailing process, scoffing at one company they acquired that organized its warehouse alphabetically. "It took them twice as long to sort half as many movies," he says. Tran's duties include working with the firm's $300-an-hour lawyer, trying to minimize the risk they'll be sued for breaking obscenity laws. (On advice of counsel, they don't ship to Alabama, Tennessee, or parts of Utah, Texas, and Pennsylvania.) They apply the same attention to detail to the site itself, which is considered by the industry to be the best of its kind. That's not too tough, Tran says. "These aren't the most tech-savvy people in the world," he observes. "When you ask them about backend systems, they're thinking anal."

For all the diligence and expertise of its founders, WantedList has yet to turn a profit. According to Tran, that's only because it's spending heavily on marketing. Indeed, WantedList's competitors say that a niche DVD-by-mail service could break even with just 10,000 subscribers. At 25,000 subs, WantedList has annual revenue of nearly $7 million. Buying new DVDs eats up $1.2 million, and mailing them consumes another $1.8 million. Rent, labor, and marketing costs suck down the rest. "At any point in time, we could make money by cutting expenses," Tran says, though that would slow their growth.

That could be healthy bravado - or it could be delusion. Even on the all-you-can-eat pricing model, customers watch less porn than Ting and Tran expected. WantedList subscribers average six DVDs per month, compared with eight or nine from Netflix. Why? "You watch porn in spurts," says Ting. "You don't watch the whole movie in one sitting."

In fact, the market for unlimited porn appears far smaller than they envisioned. At XRentDVD, a rival of WantedList, more customers choose to pay $2.95 per movie instead of a monthly all-you-can-watch fee. "The majority of people out there are casual viewers - they only need a movie or two every so often," says general manager Vincent Sorvino.

Now the company is in a race against technology. Within five years, Tran says, video-on-demand will likely render the DVD-by-mail model obsolete. And though Ting and Tran together own more than 90 percent of the company, they're hardly cashing in: They pay themselves about $50,000 a year, less than several of their employees earn and far less than the $120,000 and $70,000 they made, respectively, at Andersen.

Things might still come together for the WantedList guys. They may actually be creating those new porn consumers they hope to cultivate: 20 percent of their subscribers are women, but only 5 percent of video store porn renters are female. And obscure and individualized fetishes mean that WantedList can stock as few as 10 copies of many movies; Blockbuster.com has to stock its mainstream flicks by the thousands.

Meantime, their parents have learned the true nature of their "Web consulting business," and while they're not wild about it, no one has been disowned. And on the romance front, the founders say their X-rated jobs have only enhanced their lifestyles. "Imagine seeing these girls in hot movies and then one day dating [one]," says Ting, who dated an actress named Devon, a former Penthouse Pet and star of movies like Hayride Honeys. "Girls who turn their nose up at us when we tell them what we do, they wouldn't be that much fun to hang out with anyway." And should their love lives hit a dry patch, no worries - they have 15,000 ways to entertain themselves in the warehouse, just a few feet from their desks.